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Fisker battles problems as the Karma finally lurches toward launch

Fisker Automotive has started delivering its $103,000 Karma hybrid sedan to buyers.

Supplier squabbles

All Henrik Fisker wants is to build his plug-in hybrid cars and deliver them to customers--some of whom have been waiting three years since plunking down $5,000 deposits.

Instead, he has been fending off criticisms aimed at his green-car company as shipments of his $103,000 Karma plug-in hybrid sedan have been delayed by cash flow troubles, regulatory snarls and a recall.

But when a startup such as Fisker Automotive accepts a Department of Energy loan in a down economy, having the company tossed around like a political football comes with the territory. Fisker describes launching his first car in this environment as "running over fire while people are whipping you."

It clearly hasn't been easy. Supplier relations are frayed, and Fisker Automotive's image has taken some hits in Congress and the news media. But the company is forging ahead toward big goals: delivering about 2,500 ordered Finnish-built Karma sedans by the end of the second quarter, then starting prototype production of its second car, the Project Nina mid-sized sedan, in Wilmington, Del., in the second half.

"You are not a car company until you are making revenue-generating cars, and we are making $2 million a day," Fisker, 48, the former chief designer for Aston Martin, said in a recent interview coinciding with the delivery of the first production cars to U.S. dealerships. "We've been an extremely lean car company, and now we're going to experience tremendous growth.

"I am happy we never have to launch our first car again. Once you've done that, it's not like it's easy, but you have systems in place to start coming out with new cars. Otherwise, it's so much capital and energy."

If there is a sign that Fisker Automotive is moving from startup to established company, it's visible in its new headquarters in Anaheim, Calif. The lobby floor and steps are made from the reclaimed hardwood skids from the Delaware plant. Upstairs, a vast warren of engineers buzzes with activity.

Fisker Automotive's headquarters employee count has soared from 150 in 2010 to about 650 today. Another 100 employees are prepping the Delaware plant to start pilot production of the Project Nina sedan.

"Building a few thousand Karmas in Finland is one thing, but manufacturing in Delaware at 80,000 to 100,000 units a year is mass manufacturing," said Fisker, who, despite moving the company headquarters from Irvine to Anaheim, has maintained the dim, Bond-villain lighting of his executive office.

Fisker is reluctant to give details about the second car, saying only that it will lose its Project Nina development name before it goes on sale in mid-2013 and that its range-extending engine will be provided by BMW. Fisker Automotive is not taking deposits on the car.

"We are keeping Nina very low key because we don't want to emphasize that car as we are launching Karma," Fisker said. "We learned the hard way when you start launching a car four years ahead of schedule. We had delays with Karma. We had an aggressive schedule and we didn't meet it. People remember that."

Bringing the Karma to market has been a balky process. Fisker blames delays in government emissions and crash certification in various markets. He said there are no production problems at contract manufacturer Valmet Automotive Inc. in Finland. The most notable hiccup was the holdup in financing in 2009 after the global economic collapse, which delayed the company's plans by nearly a year.

Currently, 1,500 Karmas are in ports, on the water from Finland or in various stages of assembly, a spokesman said. Of the 2,500 Karmas on order, about 70 percent are for U.S. customers.

Two recent signings of top-flight auto executives may give Fisker Automotive a jolt of legitimacy. Former Chrysler CEO and General Motors manufacturing whiz Tom LaSorda, 57, signed on as vice chairman and strategic adviser. And Ford, Mazda and Jaguar veteran Richard Beattie, 57, will be Fisker's global sales, marketing and customer service boss.

Compared to Solyndra

But other issues are percolating that have observers wondering if Fisker Automotive has its act together.

Fisker Automotive separated from powertrain supplier Quantum Fuel Systems Technologies Worldwide Inc. in early 2011 when Fisker decided that it should take its intellectual property in-house. Less than three years ago, Quantum was key to the development of the Karma's hybrid-electric powertrain system. Now Fisker believes his team can go it alone technologically, especially when intellectual property is involved.

"Quantum was right at the time, when we needed to outsource," Fisker said. "When we grew, we realized there were things we needed to own, and we can afford to own it. That's powertrain and vehicle integration."

Quantum did not respond to repeated requests for comment.

Also, because of the slowed rollout of the Karma, Fisker Automotive has dialed back orders for lithium ion batteries. As a result, battery maker A123 Systems laid off 125 people.

If Fisker Automotive returns to its original goal of building 15,000 Karmas in 2012, A123 workers in Waltham, Mass., likely will be called back. It's more a matter of delayed production than a lack of demand, Fisker said.

"You have to order parts three, four, five months ahead. You have to manage inventory," he said. "And as a new company, having inventory, too much inventory, it's much tougher than an existing company with credit lines they can draw down on. We were late [with production] and we needed to adjust."

In late December, A123 announced that some hose clamps in the battery packs' internal cooling systems could leak, creating an electrical short circuit. Fisker Automotive recalled 239 Karmas, further delaying delivery of cars to consumers. Last week Fisker said all affected cars had been repaired.

Another troubling area: Some suppliers are demanding immediate payment for parts. Fisker responded that such payments are standard practice for fast-growing startups.

"When you grow and make much bigger purchases, you move into different areas or contracts. When we started, we paid a lot upfront," Fisker said. "Then with some suppliers we did some amortizing, and with others we still had to pay upfront because we wanted to own the tools. Each supplier is different."

Canceled orders

Then there was the Oct. 20 ABC News report, which Fisker says stretched the boundaries of truth and fact--but which nonetheless has damaged Fisker Automotive's image.

Reporter Brian Ross alleged Fisker Automotive's $529 million Department of Energy loan is financing manufacturing in Finland and has yet to benefit the U.S. economy. The story compared Fisker to failed solar-panel maker Solyndra, which went bankrupt after receiving a loan guarantee under a DOE program.

The report triggered Republican criticisms of the Obama administration's backing of green-tech ventures. Republican presidential candidate Mitt Romney has chastised the Fisker loan, writing that the "U.S. government shouldn't be playing venture capitalist. It's not merely that government bureaucrats are bad at picking winners. The very process invites cronyism and outright corruption."

U.S. Rep. Tim Murphy, R-Pa., has called for an investigation of Fisker's DOE loan by a House subcommittee.

Fisker is waiting impatiently for the story to fade away. He said the DOE loan only allows the automaker to create U.S. jobs and to compensate local suppliers for tooling. He said Fisker Automotive has drawn down $170 million for Karma engineering development and $30 million for Nina development. He insists that the company has made all interest payments on time.

"We have DOE covenants that have to be fulfilled [to get loan money]. We have 40 suppliers in Michigan. We get stuff made outside [the United States], but everyone does. No DOE money went to Finland," Fisker said.

He added that use of loan money has been audited. Still, Fisker defended using Valmet Automotive in Finland to build the Karma before starting its own plant for the Nina.

"It is vital to get the company off the ground that way. If the first thing you do is invest in a new plant, you are like DeLorean and you run out of money to develop a car," Fisker said. "It is also risky for a car company to start the company, develop a car and also be learning how to make quality manufacturing, all at the same time."

Hurdles for Fisker

Fisker's problems may have contributed to canceled customer orders.

Marti Eulberg, vice president of sales and marketing, said about 5 percent of the company's orders have been canceled. Some customers canceled because they were tired of waiting, or the car didn't match their expectations, or because their previous car's lease ended before Fisker Automotive could deliver the Karma, she added.

Fisker has taken some heat because of repeated increases in the base price of his car, which has soared from an estimated $80,000 when the car was announced in 2009 to $103,000, including shipping, in December. Fisker said he will honor whatever sticker price was in place when a car was ordered, regardless of when the car is delivered.

"When you predict your price four years ahead of the sale date, you don't know how much the technology will cost because you haven't invented it yet," Fisker said. "The recent increase is valid, and in America the Karma is still cheaper than anywhere else in the world."

Fisker said he has received no complaints from his dealer body of 44 franchised North American outlets. He calls his dealers "awesome."

Dealers have not had to pay franchise fees, but they have had some facility requirements, such as a solar-powered dealership sign, a color and trim display and an interactive tabletop video screen that shows vehicle features, design and technology. Fisker did not say how much a dealer spends on a typical facility.

Some dealers are tacking on features. Multiline dealer Mike Sullivan of Santa Monica, Calif., said, "The cost of entry wasn't a lot, but in making the facility, it's been 40 grand here and 40 grand there, and it surprisingly snuck up to about a half-million dollars."

But Sullivan has such faith in Fisker that he has become an investor in the company.

Sullivan said he is wary of products by some green automotive startups.

"There's a lot of stuff I don't want to put my name on," said Sullivan, whose solar-powered home is going to recharge his Fisker and plug-in Prius at night.

"I'm not stupid for Fisker. We have had some cancellations from people who don't want to wait, who thought it was a sports car, who think it's too heavy. But for the next several years, the range-extended electric vehicle has a broader comfort zone than electric-only. This appeals to a more pragmatic buyer."

Fisker sees Sullivan's enthusiasm as an indicator of his company's potential.

"The dealers have committed to Fisker. They have seen our product range," Fisker said. "They come back saying, 'We can sell this car.' That gives me more comfort than any analyst's statement."

Despite the rapid growth of its employee count, Fisker Automotive is still lean as car companies go. Fisker said people often ask him what "big car company" is behind Fisker Automotive.

As a startup, Fisker Automotive can act much faster than if it was a larger company's brand, Eulberg said.

When the automaker decided to do its dealer sales training solely by iPad, three managers sat in a room for an hour and mapped out the app, then farmed it out to a digital marketing firm, completing it in weeks, Eulberg said. The "ride-along" function in which Henrik Fisker narrates the vehicle functions during a test drive never would have flown at an established automaker, she said.

Fisker knows some people want to see him fail. But his confidence, which can be viewed as arrogance, never wavers.

"There probably are people who think Fisker is a risky company, because we're new and have DOE funding, and that's something we're going to have to live with," Fisker said. "Even though we have a car in production, we are going to have skeptics."

As Fisker Automotive launches its Karma plug-in hybrid, it faces a batch of obstacles.